Internal Models for Risk Weighted Asset Computation in the ......firms such as Insurance companies AIG, Fannie Mae, Freddie Mac the whole financial market. Company Confidential - For

Company Confident ial - For Internal Use Only

Copyright © 2015, SAS Inst i tute Inc. Al l r ights reserved.

INTERNAL MODELS

FOR RISK WEIGHTED ASSET COMPUTATION

IN THE MEDIUM SIZE BANKS

FINANCE & RISK MANAGEMENT WEBINAR SERIES – 6 MAY 2015

CHRYSOSTOMOS KRIDIOTIS – SALES MANAGER

XAVIER VANDERMOSTEN - SENIOR BUSINESS DEVELOPMENT MANAGER - EMEA/AP RISK CENTER OF EXCELLENCE



AGENDA

Context

Impact of moving from SA to IRB

SAS framework for helping you to move to IRB



CONTEXT FINANCIAL SECTOR CRISIS



CONTEXT FINANCIAL SECTOR CRISIS

ORIGIN = The “subprime” mortgages - 1st victim = Northern Rock (Sept 2007).

Abuse of securitized emissions

• Mortgage Backed Securities

• Asset Backed Securities

Contagion to:

firms such as Insurance companies AIG, Fannie Mae, Freddie Mac

the whole financial market



CONTEXT FINANCIAL SECTOR CRISIS – SOME CONSIDERATIONS

Six root causes of the financial crisis:

1. Excess Leverage

2. Liquidity Mismatches

3. Too big to fail

4. Conflicts of Interest

5. Tax and Subsidies

6. Governance

Underestimation

of the risks

Underpricing of

the risks

• Insufficient consideration

of systemic aspects

• Inadequate models to

measure stressed

situations

• Inadequate management

of the liquidity risk

• Inedaquate governance

• New regulations

(Basel III, EMIR,

AQR, IFRS9, …)

• Current European

economic state (low

IRs, very low

growth, …)



CONTEXT BASEL III

Pillar1

Capital Adequacy

Available Capital

RWA

Credit

Standard IRB-F IRB-A

CCR Exposure

CEMStandardized

Method

IMM (EPE)

Wrong Way Risk

Market

Standard Internal Model

VaR

Stressed VaR

IRC

OperationalLeverage

RatioLiquidity Ratios

LCR NSFR Monitoring

Pillar-II

ICAAP etc.

Pillar-III (Public

Disclosure)

CVA LE cap

New Changes

- Higher capital requirements

- Better risk evaluation



CONTEXT BASEL III

Higher capital

requirements



CONTEXT PRESSURE ON BANKS’ PROFITABILITY

A lot of constraining

demands on banks

Recapitalize

Long term loans with long term funding

Finance economies at lowest IR possible

Continue to finance countries, even if signs of high fragility

Risky assets only if incorporation of risk premium

Pay additional taxes (to finance cost of debt crisis, part of pension system)

Provide banking services at reduced prices

Fragile/Very low

growth economy+

Banks

Capital is a scarce resource !

-> let’s minimize capital requirement

Risk premium charge should correspond to

true risk



FROM SA TO IRB IMPACT ON CAPITAL RATIO OF MOVING FROM IRB TO SA(1)

1 Accenture, «The New Importance of Risk-Weighted Assets across Europe”

You can expect a

significant capital

requirement

decrease



FROM SA TO IRB

Better estimates of

true risks

MORE RISK SENSITIVE MANAGEMENT

SA IRB



SAS FRAMEWORK INTEGRATED PLATFORM

Macro-economicscenarios

Macro-economicmodels

Best Fit:

PD pit

LGD pit

Projections

year1, year2, year3

TransformationPD Reg

LGD Reg

Laboratory Environment

Source Systems/DWH

Reg

ula

tory

Are

a

Exposure & CRM Valuation

RW Calculation

CRM Optimization

Regulatory Capital

CRMB

• Risk Parameters

• Provisions

• RWA & Capital

• Business Model

• Other risks: simplified approach

Simulation

What if &

Optimization

Capital Planning and Management

Ma

na

ge

me

nt &

Str

ate

gy

Risk Parameters Scenario

• PD Reg

• LGD Reg

Risk Factors Scenario

• IR

• FX

• ..


• Real Estate Prices



SAS FRAMEWORK DATA MANAGEMENT

Source Systems/DWH

• Data extraction / transformation / loading tools (ETL)

• Data quality tools

• SAS banking data warehouse – unique version of the truth as input for all risk analysis



SAS FRAMEWORK CREDIT SCORING

Source Systems/DWH



Best Fit:

Pd pit

LGD pit

Projections

year1, year2, year3


LGD Reg

Advanced Data Collection

Fit & Validate Models

PD pit

PD pit1 PD reg1

PD pit2 PD reg2

PD pit3 PD reg3

LGD pit

LGD pit1 LGD reg1

LGD pit2 LGD reg2

LGD pit3 LGD reg3


• PD, LGD , CCF, Loan Origination, … +

decisioning

• Ability to prepare (explore, select) data for a

model

• Ability to define, deploy and monitor models

through wizards and interfaces without having

to write code

• Fully auditable environment (data traceability,

access rights and users profiling, model

documentation)

• Advanced analytics (GOF tests, back

testing, segmentation, logistic regression, …)

• Scenario generation (Model shocks, Risk

Factor shocks, Mixed)



SAS FRAMEWORK REGULATORY CREDIT RISK CAPITAL REQUIREMENT



Best Fit:

PD pit

LGD pit

Projections

year1, year2, year3


LGD Reg


Source Systems/DWH

Reg

ula

tory

Are

a


RW Calculation

CRM Optimization

Regulatory Capital

CRMBRisk Parameters Scenario

• PD Reg

• LGD Reg


• IR

• FX

• ..



• SA, FIRB, AIRB (CRD - Basel III & II)

• Ability to use a mix of approaches

• Ability to define and run stress scenarios

• Optimization of collateral allocation

• Multi entity & Multi Currency

• CVA (SA)

• CCR (CEM, OEM)

• Pre-defined COREP reports



SAS FRAMEWORK CAPITAL PLANNING AND MANAGEMENT

• Risk Parameters

• Provisions

• RWA & Capital

• Business Model


Simulation

What if &

Optimization


Ma

na

ge

me

nt &

Str

ate

gy

• Integration of risk and finance

• Management of capital: allocation and forecasting of capital, both for a base

case and stressed scenarios

• Consolidation and aggregation of measures (RC, EC , Liquidity)

• Strategic and Basel Pillar II



SAS FRAMEWORK INTEGRATED PLATFORM



Best Fit:

PD pit

LGD pit

Projections

year1, year2, year3


LGD Reg


Source Systems/DWH

Reg

ula

tory

Are

a


RW Calculation

CRM Optimization

Regulatory Capital

CRMB

• Risk Parameters

• Provisions

• RWA & Capital

• Business Model


Simulation

What if &

Optimization


Ma

na

ge

me

nt &

Str

ate

gy

Risk Parameters Scenario

• PD Reg

• LGD Reg


• IR

• FX

• ..





SAS FRAMEWORK BUSINESS ANALYTICAL FRAMEWORK



SAS FRAMEWORK CAPITAL OPTIMIZATION

• Full flexibility in the definition of : • Goals

• Constraints

• Availability of powerful and robust

algorithms

• Dynamic reporting/exploration of the

input data and results at different levels of

aggregation



CONCLUSIONS

Banks’ profitability is under pressure because of Basel III and of current state of economy …

… therefore, may be the right time to move from SA to IRB …

… in order to decrease the cost of capital and enhance profitability thanks

to better strategic and operational decisions supported by more precise

and quicker risk assessments.



FINANCE & RISK

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Documents

Internal Models for Risk Weighted Asset Computation in the ......firms such as Insurance companies AIG, Fannie Mae, Freddie Mac the whole financial market. Company Confidential - For